Inflation, government and the people

The current phase of inflation seems to have undone much of the good that the UPA government created for itself through a “revolutionary budget” as Sonia Gandhi put it. The ‘Times of India’ describes this whole process as ‘pollonomics’. The government obviously wanted to showcase itself as a magnanimous organizing body which was compassionate enough to call of all the money which was due from the farmers, which was actually anyway lost, but calling it of at the most propitious time when elections are due would have resulted in electoral and political gain for the government. But now all that ‘good work’ (of a few weeks!!) may not ultimately give the government the edge that it needed for the next election. The BJP and CPI (M) are already threatening a nation wide agitation in second week of April if prices are not under control by then.

Whether the government will still win the election or not is a different matter, let us look at the phenomena of inflation that we are facing at the moment. First of all it is a global phenomenon; there is a jump in the food prices in the world market. Let us compare our inflation rate with the country we always like getting compared with for every reason, China. Currently China is growing at 11.4% and the inflation has hit a 12 year high of 8.7%, now that’s something to scream about, “inflation nearing 9%” almost sounds like “I have put on 20 kgs in one month and I have to lose the same in 15 days!” There is no doubt that bringing down the inflation rate from such a high rate not only takes a little time but it also affects the growth rate. We have already seen a drop in our economic growth rate to 8.7% from the high of 9.4% in 2007. Basically there is a clash between these two objectives of growth and maintaining price stability, but with both these figures going to their worse end we might have to face stagflation. Stagflation was a term employed by the supply side economists in the 70s, to describe the then existing economic crisis, and moreover they(supply side economists) held that these crisis had resulted because of neglecting aggregate supply in the economy and only focusing and framing demand managed polices which were advocated by Keynes. However, stagflation is not a properly defined term in economics, we know that when there is negative growth in two quarters continuously it is called recession, but there is no so such barometer which you plan plug in an economy and determine whether stagflation exists or not.

Now let’s look at the measures taken by the government to tackle the problem of inflation. First and foremost it must be mentioned that this problem will not be short-lived, as the latest report of the Asian Development Bank says that inflation will be a regular problem with the Asian countries. But the government undoubtedly has to do something for two reasons:

a) To ensure the welfare of the people

b) To win the next election (I can’t stop talking about it!)

So lets see what the government has done, first it has banned the exports of various commodities including rice, next it has abolished import duties to increase imports and increase supply of goods in the domestic market, then it has banned forward trading and recently it was reported that it is also taking measures to control prices of cement along with food articles by importing cement from Pakistan at Rs150-175 for a bag of 50 kg (it is sold at 225-240 in the northern states). Now all of these measures consist the supply side polices, along with that there are some monetary and fiscal polices also that he government might undertake, like increasing interest rates (it’s actually done by the RBI) tight money supply to prevent demand pull inflation and appropriate fiscal management. Apart from this the government also considers increasing food subsidies to bring about temporary stability in prices. However, while all these policies are being implement it is interesting to note that currently many countries are facing the problem of inflation, therefore they are also implementing similar such policies if not identical, what happens then?? If our government decides to ban exports and abolish import duties to increase supply, it can happen that other countries are doing a similar thing; Saudi Arabia is already implementing these policies. So how then does the government proceed with this problem? Im not saying this is happening per se at the moment, but currently with many countries facing a similar problem this is a theoretical possibility.

It is needless to say that the above policies will affect growth and in turn the stock market but this is inevitable, controlling inflation at the moment is of utmost importance, all the national newspapers can wait for a few months to write their favorite headline “Growth back on track” and “Sensex like never before”.